Cross listing, bonding and firms' reporting incentives: A discussion of Lang, Raedy and Wilson (2006)

Lang, Raedy and Wilson (henceforth LRW) (2006) compare the properties of U.S. GAAP accounting numbers across cross-listed and U.S. firms. Using a wide range of properties, LRW show that accounting data are not comparable, even though sample firms use the same accounting standards. I discuss how these findings advance the literature and what they imply for the effectiveness of cross listing as a bonding mechanism. My discussion highlights that documented differences cannot be solely attributed to weak U.S. legal enforcement. I emphasize that accounting standards provide discretion and that cross-listed and U.S. firms are likely to have differential incentives to use this discretion. To illustrate, I document that cross-listed and U.S. firms differ in ownership concentration and that these differences are associated with the level of earnings management. I also provide evidence that home-country institutions continue to influence cross-listed firms' reporting behavior.